Re Eliana Construction and Developing Group Pty Ltd (No 2)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS' LIST

S CI 2017 01458

RE ELIANA CONSTRUCTION AND DEVELOPING
GROUP PTY LTD (IN LIQUIDATION)

MAD BROTHERS EARTHMOVING PTY LTD	Appellant
v
ANTHONY ROBERT CANT in his capacity as liquidator of Eliana Construction and Developing Group Pty Ltd (in liquidation)	First Respondent
and
ELIANA CONSTRUCTION AND DEVELOPING GROUP PTY LTD (in liquidation)	Second Respondent

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	9 May 2019
DATE OF JUDGMENT:	19 August 2019
CASE MAY BE CITED AS:	Re Eliana Construction and Developing Group Pty Ltd (No 2)
MEDIUM NEUTRAL CITATION:	[2019] VSC 546	First revision: 22 August 2019

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CORPORATIONS – Appeal from decision of associate justice finding that payment of debt by an associated company of the debtor to the creditor constituted an unfair preference payment to the creditor – Consideration of circumstances where a debt of company A paid by company B constitutes a preference payment received by the creditor – Consideration of what constitutes a payment made by or received from the debtor – Consideration of whether creditor received payment in good faith – Held no unfair preference – Held good faith defence established – Appeal allowed – Sections 9, 588FA, 588FE, 588FF and 588FG of the Corporations Act 2001 (Cth) – Re Evolvebuilt Pty Ltd [2017] NSWSC 901 applied.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr S V Palmer with Mr P J Rule	Oakley Thompson & Co Pty Ltd
For the Respondents	Mr C R Brown	White Cleland Pty Ltd

TABLE OF CONTENTS

Introduction.......................................................................................................................... 1
The background facts.......................................................................................................... 2
The relevant legislation...................................................................................................... 4
The associate justice’s findings......................................................................................... 6
Grounds of appeal............................................................................................................... 9
Grounds ten and eleven – Was Rock Development a debtor of Eliana?.................... 9
Grounds one to nine – Did Eliana make the payment to Mad Brothers?................. 13
Ground twelve – Was Rock Development liable as an undisclosed principal?..... 27
Grounds thirteen to seventeen – Did Mad Brothers establish a defence under s 588FG(2)? 28
Relevant principles........................................................................................................... 30
Chronology of matters relevant to the good faith defence.......................................... 33
Consideration..................................................................................................................... 36
Conclusion.......................................................................................................................... 43

HIS HONOUR:

Introduction

This is an appeal from a decision of an associate justice. In Re Eliana Construction and Developing Group Pty Ltd (in liq),[1] Efthim AsJ found that, on 15 September 2016, the appellant (‘Mad Brothers’) received a payment of $220,000 from the second respondent (‘Eliana’), and that that payment was a preference within the meaning of s 588FA of the Corporations Act 2001 (Cth) (‘Corporations Act’) and voidable pursuant to s 588FE(2A) of the Corporations Act. Orders were made pursuant to s 588FF of the Corporations Act that Mad Brothers pay the respondents (Eliana and its liquidator) the sum of $220,000, together with interest and costs.
[1](Supreme Court of Victoria, Efthim AsJ, 1 November 2018) (‘Re Eliana (in liq)’).

Eliana was indebted to Mad Brothers in respect of excavation works undertaken by Mad Brothers at Eliana’s request. Mad Brothers issued a statutory demand and winding-up proceedings against Eliana when the debt remained unpaid. Another company related to Eliana, Rock Development & Investments Pty Ltd (‘Rock Development’), borrowed money from Nationwide Credit Pty Ltd (‘NWC’) on security provided by Rock Development. This money was used to discharge the debt owed by Eliana to Mad Brothers, pursuant to terms of settlement compromising the winding-up proceedings commenced by Mad Brothers against Eliana. Eliana entered into liquidation shortly after and its liquidator pursued the payment as an unfair preference.

Mad Brothers denied that the payment by Rock Development (or by NWC) constituted a payment by Eliana and that, in those circumstances, was not a transaction that was voidable under the Corporations Act. The associate justice, however, held that it was sufficient that Eliana had authorised and ratified the payment by Rock Development to Mad Brothers to establish that Eliana had made the payment of $220,000 to Mad Brothers. In doing so, his Honour purported to follow the obiter dictum of Gordon J in Burness (as liquidator of Denward Lane Pty Ltd (in liq)) v Supaproducts Pty Ltd (‘Burness’).[2]
[2](2009) 259 ALR 339 (‘Burness’).

While expressing that it was unnecessary to determine whether any moneys were owed by Rock Development to Eliana to establish a preference, his Honour nevertheless found that, at the time of the payment to Mad Brothers, Rock Development was indebted to Eliana for at least $600,000. The associate justice also held that Mad Brothers failed to establish the defence under s 588FG of the Corporations Act, which is commonly known as the ‘good faith’ defence.

For the following reasons, I find that the respondents did not establish that Eliana was owed $600,000 by Rock Development, or any other sum, and that in those circumstances the payment by Rock Development to Mad Brothers did not constitute a payment by Eliana to Mad Brothers. I find that the obiter dictum of Gordon J in Burness should not be followed in the particular circumstances of this case. In the event I am wrong and Rock Development did owe $600,000 to Eliana, then I would consider that the payment by Rock Development to Mad Brothers of $220,000 in the circumstances would have constituted a preferential payment by Eliana to Mad Brothers.[3]
[3]Subject to a deduction in the sum of $87,256.15 to reflect a debt owed by Rock Development to Mad Brothers directly, discussed at [82]–[87] below.

As will become clear, however, this point does not affect the outcome of the appeal, as I have concluded that Mad Brothers has established the defence under s 588FG of the Corporations Act and that the appeal should be allowed.

The background facts

Eliana was formed in 2008 and its sole director at all times was Mr Magdy Sowiha. It and other related companies carried out property development and building. Rock Development was a related company of Eliana of which Mr Sowiha was also the sole director. Rock Development was the developer that engaged Eliana as the builder in several projects and in particular the projects on which Mad Brothers provided services to Eliana.

In November 2015, Eliana engaged Mad Brothers to carry out earthmoving work at various sites. By March 2016, Eliana had incurred a debt of $236,952.31 with Mad Brothers. On 23 March 2016, Mad Brothers’ lawyers forwarded a letter of demand to Eliana demanding payment of $236,952.31. The letter stated that if the outstanding debt, together with interest and costs, was not paid by 29 March 2016, proceedings would be issued against Eliana and Mr Sowiha personally.

In April 2016, Mad Brothers issued a statutory demand to Eliana in relation to the debt. Eliana did not seek to set aside the statutory demand, nor did it pay the debt. Mr Sowiha said that the statutory demand did not come to his attention until after the 21 days provided in the statutory demand had already elapsed.[4]
[4]Affidavit of Mr Sowiha dated 15 March 2018 [13].

In June 2016, Eliana was served with a winding-up application by the Victorian WorkCover Authority. That application was dismissed on 20 July 2016 after an agreement was made by Eliana with the WorkCover Authority to pay its debts by instalments.

On or around 8 June 2016, Mad Brothers issued a winding-up application against Eliana which was listed for hearing on 20 July 2016. The application was adjourned on three occasions.

On the day before the final return date of the winding-up application, Eliana and Mad Brothers settled the proceeding, whereby Eliana agreed to pay $220,000 to Mad Brothers in full discharge of the debt. A settlement agreement was entered into between the parties. The debt was paid by NWC. NWC’s facility was with Rock Development, because Rock Development’s properties were provided as security for a loan from NWC.

Eliana ceased trading and suspended its workforce in August 2016. Mr Sowiha placed Eliana into voluntary administration on 11 October 2016. At a creditors’ meeting on 3 November 2016, the creditors voted to place Eliana into liquidation and Mr Cant was appointed as the liquidator.

The relevant legislation

The Corporations Act provides as follows:

Section 9
transaction, in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
(a)a conveyance, transfer or other disposition by the body of property of the body; and
(b)a security interest granted by the body in its property (including a security interest in the body's PPSA retention of title property); and
(c)a guarantee given by the body; and
(d)a payment made by the body; and
(e)an obligation incurred by the body; and
(f)a release or waiver by the body; and
(g)a loan to the body;

and includes such a transaction that has been completed or given effect to, or that has terminated.
…
Section 588FA
Unfair preferences
(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a)the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b)the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

…
Section 588FE
Voidable transactions
…
(2A)The transaction is voidable if:
(a)the transaction is:
(i)an uncommercial transaction of the company; or
(ii)an unfair preference given by the company to a creditor of the company; or
(iii)an unfair loan to the company; or
(iv)an unreasonable director-related transaction of the company; and

(b)the company was under administration immediately before:
(i)the company resolved by special resolution that it be wound up voluntarily; or
(ii)the Court ordered that the company be wound up; and

(c)the transaction was entered into, or an act was done for the purpose of giving effect to it, during the period beginning at the start of the relation-back day and ending:
(i)when the company made the special resolution that it be wound up voluntarily; or
(ii)when the Court made the order that the company be wound up; and

(d)the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of, the administrator of the company.

…
S 588FF
Court may make orders about voidable transactions
(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a)an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b)an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c)an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d)an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:
(i)money that the company has paid under the transaction;

(ii)proceeds of property that the company has transferred under the transaction;

(e)an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;
(f)if the transaction is an unfair loan and such a debt, security or guarantee has been assigned–an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;
(g)an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
(h)an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;
(i)an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;
(j)an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.

The associate justice’s findings

The associate justice found that there was no dispute between the parties that:

(a) there was a transaction pursuant to the definition in s 9 of the Corporations Act;

(b) Eliana was insolvent at the time of the payment;

(c) Mad Brothers (if the payment was received from Eliana) received more than it would have in the liquidation of Eliana; and

(d) Mad Brothers provided valuable consideration in relation to the debt (for the purposes of s 588FG(2)(c) of the Act).

The associate justice found that the major issue was whether the payment of $220,000 to Mad Brothers was a payment made by Eliana. The respondents alleged that on or about 15 September 2016, Eliana authorised its associated entity Rock Development to make the payment to Mad Brothers and Rock Development made the payment for and on behalf of Eliana. The respondents also alleged that at the time of the payment, Rock Development was a debtor of Eliana. The respondents contended that the authority was inferred by the fact that the sole director and shareholder of Rock Development at the time of the payment, Mr Sowiha, was also a director and shareholder of Eliana.

Mr Sowiha said that he had sometime earlier applied for finance from NWC, who he regarded as a lender of last resort because its interest rate was 36 per cent per annum. Mr Sowiha explained that NWC’s facility was with Rock Development because Rock Development’s properties were provided as security.
Under cross-examination, Mr Sowiha denied that he asked NWC to pay the sum of $220,000 directly to Mad Brothers. Mr Sowiha said that rather it was a condition imposed by the representative of NWC with whom Mr Sowiha negotiated the loan on behalf of Rock Development.

As mentioned, his Honour found that the payment was by Eliana to Mad Brothers and not by Rock Development to Mad Brothers, as the payment was authorised or ratified by Eliana. The associate justice, while rejecting the submission that it was necessary to establish a debtor/creditor relationship between Eliana and Rock Development, nevertheless found that there was such a relationship. His Honour relied on evidence including the following to demonstrate that such a relationship existed:

(a) a building contract between Sentosa Apartments Pty Ltd (‘Sentosa’), Rock Development and Eliana, where Sentosa and Rock Development are referred to as owners, and Eliana is referred to as the builder;

(b) an agreement with Delphi Bank, whereby Delphi Bank was requested by Rock Development to make payments directly to third parties in connection with completion of works at Bulleen. This agreement was apparently evidenced by an undated and unsigned deed between Bendigo and Adelaide Bank Limited, Sentosa, Rock Development as borrower, and Eliana as builder;

(c) the general ledger report of Eliana which records various debts and credits between Rock Development and Eliana, excluding unpaid progress payments;

(d) Mr Cant, the liquidator of Eliana, gave evidence that Eliana was owed moneys for the development work, and the non-payment of those moneys gave rise to a significant deficiency in Eliana;

(e) Mr Cant concluded that, in his opinion, Rock Development was a debtor of Eliana. In his report, he stated:

From my enquiries and investigations to date, it appears that the loan account ledger did not accurately reflect the relationship between the entities and it appears that Rock was a debtor of the Company. The Company was the appointed builder of a property development project situated at 194-196 Manningham Road, Bulleen and the property developers were Sentosa Apartments Pty Ltd (“Sentosa”) and Rock. Under the building contract dated 10 April 2014, Rock and Sentosa were jointly and severally liable to the Company for building works and other works. From my investigations it appears that the amount of approximately $1.2million is outstanding for unpaid invoices dated between August 2014 and February 2016 and further, it appears that Rock’s debt to the Company has not been included as a debit in the Company’s loan account Ledger. As such, I am of the view that based on the information available that Rock is a debtor of the Company and has been a debtor of the Company since the end of 2014.[5]

[5]Affidavit of Anthony Robert Cant dated 7 March 2018, exhibit ARC-12.

The associate justice was satisfied that Rock Development was a debtor of Eliana, finding that there was no doubt that there was a $600,000 shortfall by the joint venturers (including Rock Development) to Eliana.

The respondents further submitted before the associate justice that if the Court found that Rock Development was not a debtor of Eliana at the time of payment, then there was much evidence of an interdependent financial relationship between Rock Development and Eliana. They submitted that Eliana and Rock Development were involved in a number of developments together, with Rock Development as the developer and Eliana as the builder and that Mr Cant had found that it appeared that for some of these developments, Eliana was not paid in full, but apartments were transferred to the director.

Grounds of appeal

The seventeen grounds of appeal extend over six pages. In Mad Brothers’ written submissions:[6]
[6]Appellant’s Written Submissions dated 23 April 2019.

(a) grounds one to nine are summarised as ‘Eliana did not make the payment to Mad Brothers’;

(b) grounds ten and eleven are summarised as ‘Rock Development was not a debtor of Eliana’;

(c) ground twelve is that Rock Development was liable to pay for work performed for it as an undisclosed principal;

(d) grounds thirteen to seventeen relate to the appellant’s defence under s 588FG(2) of the Corporations Act.

Grounds ten and eleven – Was Rock Development a debtor of Eliana?

It is necessary that I deal with these grounds before I deal with grounds one to nine, as I find that whether or not Rock Development owed moneys to Eliana has a bearing on whether or not the payment by Rock Development to Mad Brothers constituted a payment by Eliana within the meaning of ss 9 and 588FA(1) of the Corporations Act. As discussed below, if I am satisfied that Rock Development owed Eliana $600,000, as found by the associate justice, then I conclude that the payment by Rock Development to Mad Brothers was, in the circumstances, a payment by Eliana to Mad Brothers. If, on the other hand, I am not satisfied that Rock Development owed Eliana $600,000 or some other sum greater than $220,000, then I conclude that the payment was not a payment by Eliana to Mad Brothers, and thus the transaction was not an unfair preference given by Eliana to Mad Brothers.

Mad Brothers contends that the associate justice erred in finding Rock Development was a debtor of Eliana. It submits that Eliana’s accounts were in a mess and the respondents were unable to produce accurate accounts. Mad Brothers submits that a number of related entities, including Rock Development, had used Eliana’s bank account. Mad Brothers also points to the liquidator’s concession that it was difficult to ascertain a definitive financial position for Eliana at any point of time due to the incomplete and inaccurate state of Eliana’s books and records.

The respondents produced the general ledger of Eliana which showed that as at 16 September 2016, Eliana was indebted to Rock Development in the sum of $195,908.81. Mr Cant acknowledged the ledger showed that Rock Development was a creditor of Eliana but said that, based on his investigations, he considered that the ledger was incomplete; sums owed by Rock Development to Eliana had failed to be included in the ledger and that Rock Development was in fact a debtor of Eliana.
Mr Cant deposed that Rock Development was indebted to Eliana for $1,255,233.30 pursuant to a building contract dated 10 April 2014. He said that this debt was not included in the ledger. Mr Cant produced two documents being copies of Eliana’s record of the calculation of the outstanding debt of $1,255,233.30 and the building contract dated 10 April 2014 referred to in the associate justice’s findings above. The building contract was between Sentosa and Rock Development as the owners and Eliana as the builder. The contract expressly contemplated progress claims being made by Eliana. Two progress claims could be submitted each month and were to set out, amongst other things, the work completed.
I infer that Eliana’s calculation of the outstanding debt of $1,255,233.30 was prepared by the liquidator.[7] It identifies progress claims by number, date and amount. The document refers to progress claims as per an email from Wisewould Mahony Lawyers. Neither the email nor the progress claims were exhibited. The document lists payments to Eliana as identified by reference to Eliana’s bank statements.
[7]Affidavit of Anthony Robert Cant dated 7 March 2018, exhibit ARC-10.
The liquidator made a claim on behalf of Eliana against Sentosa for outstanding progress claims under the building contract made up of unpaid claims of $1,255,233.30 and interest of $405,944.66, totalling $1,661,177.96. As indicated above, the $1,255,233.30 is the figure calculated by the liquidator.
Sentosa responded to the liquidator’s claim by letter dated 18 May 2018 from its solicitors, Robert James Lawyers. The letter was not discovered prior to the trial and was only produced after the director of Eliana had given evidence.[8] The letter concedes that progress payments of $4,765,773.10 were made to Eliana but disputes that the sum of $1,255,233.30 or any further sum is owing to Eliana, by reason of offsetting claims that Sentosa purports to have against Eliana.
[8]Defendant’s Further Submissions dated 13 September 2018 [20].
The letter also states:
In September 2014, [Delphi Bank] informed the joint venture parties it required Rock to make an upfront contribution of $600,000 towards its equity contribution. According to the quantity surveyor’s second progress report dated 22 September 2014 (2^nd QS Report), the cost of works completed at the time of inspection on 18 September 2014 was $778,753 (ex GST). The 2^nd QS Report further shows no payments had been made to Eliana (despite the fact that an early progress claim had been assessed) and that the recommended amount for payment to Eliana was $778,753. The Bank deducted $600,000 from the assessed amount in the 2^nd QS Report and paid $178,753 to Eliana on 24 September 2014.
Mr Cant was asked in evidence whether he had any opportunity to look into the correctness or otherwise of the allegations of Robert James Lawyers. Mr Cant replied:
I can’t recall the specific terms of the joint venture agreement, and I’m not sure if I’ve seen the agreement between the joint venture parties and the bank regarding those equity contributions. However, putting my accounting hat on, I would’ve said that therefore Rock would owe Eliana 600,000 for the amount that was deducted from the progress claims.[9]
[9]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 268.26–269.16.
Accordingly, the evidence establishes that Eliana claimed that it was owed $1,255,233.30 from the joint venturers Rock Development and Sentosa. Sentosa denied the debt with detailed reasons. Mr Cant in his evidence did not respond to or address the grounds on which Sentosa denied the debt. Sentosa also claimed that $600,000 that was due to Eliana by Rock Development was taken to meet a debt of Rock Development.
The associate justice relied on this evidence to establish that Rock Development owed Eliana at least $600,000. Mr Cant, however, had not looked into the claim and was unable to shed any light on the matter. More importantly, Mr Cant relied on the letter of Robert James Lawyers to establish that Rock Development owed Eliana $600,000 but ignored the letter when it claimed that by reason of the matters set out in the letter, Eliana was not owed any money by the joint venturers Rock Development and Sentosa. Mr Cant did not seek to adjourn the hearing to investigate the matters raised in the letter, after it was produced during the hearing.
In my opinion, it was incumbent on the liquidator to have investigated the allegations made by Robert James Lawyers and, if he formed the view that the allegations that Rock Development and Sentosa did not owe any moneys to Eliana were incorrect, then he should have put forward the evidence in support of his view.
In circumstances where the liquidator was in possession of the books and records of Eliana, I find that he cannot rely on a portion of the untested letter whilst another portion of the letter asserts that no moneys were owing by Rock Development and Sentosa to Eliana, to establish that $600,000 was owing by Rock Development to Eliana.
Grounds one to nine – Did Eliana make the payment to Mad Brothers?
The associate justice found that the payment by Rock Development to Mad Brothers of $220,000 constituted a payment made by Eliana to Mad Brothers. Mad Brothers submits that the associate justice erred in making that finding. Mad Brothers contends that the payment was in fact made by NWC by bank transfer pursuant to a larger loan facility that NWC made available to Rock Development and which was organised by Mr Sowiha. Mr Sowiha said that NWC insisted through its agent or representative that $220,000 of the loan be paid to Mad Brothers. Accordingly, Mad Brothers contends that the payment to it was not made by Eliana but was in fact made by NWC.
A voidable transaction includes an unfair preference given by the company to a creditor of the company. Under s 588FA(1) of the Corporations Act, a transaction is an unfair preference given by a company to a creditor of the company if, and only if, two conditions are satisfied:

(a) Firstly, the company and the creditor must be parties to the transaction (even if someone else is also a party).

(b) Secondly, the transaction must result in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company.

The first issue to address is whether in each case (that is, where no debt is owed by Rock Development to Eliana and where $600,000 is owed by Rock Development to Eliana) the first limb in s 588FA(1)(a) was satisfied.
It is clear that a transaction, within the meaning of s 9 of the Corporations Act, can be made up of a series of interrelated or composite dealings.[10] Where a debtor and third party enter into an arrangement whereby the debtor’s creditor is paid by the third party, that would constitute a relevant transaction for the purposes of s 588FA(1)(a).[11]
[10]Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281, 288-9 (‘Re Emanuel’).
[11]Hosking v Extend N Build Pty Ltd (2018) 357 ALR 795 [92] (‘Hosking v Extend’).
If no moneys were owed to Eliana by Rock Development, then, as the transaction between Rock Development and Eliana and between Rock Development and Mad Brothers involved Eliana incurring an obligation to Rock Development, the transaction would constitute a transaction within s 9 of the Corporations Act: see the definition of transaction paragraph (e). Similarly, if Rock Development owed Eliana $600,000, then the transaction would also constitute a transaction within s 9 of the Corporations Act: see the definition of transaction paragraph (f). The transaction would have involved a release by Eliana of a portion of the debt owed by Rock Development to Eliana. I am satisfied that in each case the first limb under s 588FA(1)(a) was satisfied.
The critical question in each case is whether the second limb was satisfied, that is, did the transaction result in Mad Brothers receiving from Eliana, in respect of the unsecured debt that Eliana owed to Mad Brothers, more from Eliana than Mad Brothers would receive from Eliana, if the transaction was set aside and Mad Brothers were to prove for the debt in a winding up of Eliana within the meaning of s 588FA(1)(b).
As mentioned in the introduction, the associate justice found that the payment was made by Eliana to Mad Brothers, as the debt of Eliana to Mad Brothers was discharged by Rock Development at the request of or with the acceptance of Eliana. In doing so, his Honour accepted the obiter dictum of Gordon J in Burness.
In Burness, Gordon J considered that it was not necessary that there be evidence of a debtor/creditor relationship between the debtor and the third party in order for a third party payment to be a preference. In that case, the defendant Supaproducts Pty Ltd (‘Supaproducts’) supplied building hardware to Denward Lane Pty Ltd (‘Denward Lane’) and Denward Lane was indebted to Supaproducts under a running account. Denward Lane was wound up as insolvent. Supaproducts received payments from Denward Lane Pre Cast Panels Pty Ltd (‘Pre Cast Panels’) during the relation-back period. These were challenged by the liquidator as preferences.
Gordon J dismissed the application by the liquidator, holding that Supaproducts had established the defence under s 588FG(2)(b) of the Corporations Act, that neither it or a reasonable person in its circumstances had reasonable grounds for suspecting that Denward Lane was insolvent.
Gordon J did, however, find that the payments would otherwise have satisfied s 588FA(1)(b) of the Corporations Act. Her Honour found that it was sufficient to characterise a debt as being paid by the debtor to the creditor where it was paid by a third party to the creditor, if the debtor authorised and ratified the payment by the third party. In that situation, her Honour held that the debtor would be liable to the third party who made the payment for the sum of the payment made by the third party to the creditor to satisfy the debtor’s debt to the creditor. In other words, the transaction would result in the liability to the creditor being discharged and an equal liability to the third party being created.
Her Honour said:
[43] Payment of a debt by a third party and the consequences that result from such a payment has been the subject of much debate: see for example D Friedmann, “Payment of Another’s Debt”, and P Birks and J Beatson, “Unrequested Payment of Another’s Debt”. At the outset, a distinction is drawn between “unsolicited” benefits and “requested” benefits.
[44] If the benefit is in the form of discharge of a person’s debt (as occurred here), the first question is whether the payment by Pre Cast Panels was authorised or unauthorised by Denward Lane? If the payment was authorised, then the payment is a third party payment of the kind identified by the Court in Re Emanuel (No 14), namely:
… a course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor's debt … notwithstanding that the achievement of that end can only be realised through the participation of a third party in a particular dealing (or dealings) within the overall transaction, being a particular dealing (or dealings) to which the debtor is not or may not be a party.
[45] I do not accept that Re Emanuel (No 14) is authority for the proposition that before a payment by a third party can be taken to be a payment “accepted” or “made” by the debtor there must be evidence of an arrangement between the debtor and the third party whereby at the direction of the debtor, the third party made a payment to the creditor in discharge of an obligation owed by the third party to the debtor. That is not what the authorities establish: see Simpson v Egginton; Smith v Cox; Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr. Where a payment made by a third party to a creditor is authorised by the debtor, nothing more is required. The debt is discharged by the third party at the request of or with the acceptance of the debtor.
[46] On the other hand, if a debt is discharged by a third party payment which is unauthorised, the debt is not necessarily discharged: see Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr; Birks and Beatson; Friedmann D; R Goff and G Jones, The Law of Restitution. The debtor has a choice – to accept or not to accept the payment. If the debtor ratifies or accepts the unauthorised payment by the third party, the debtor will be liable to the third party who made the payment. In other words, the “acceptance” will give the third party a claim for money paid for and at the request of the debtor or, as it is sometimes put, impose upon the debtor a duty of restitution. If the debtor does not ratify the payment, the original debt it owed to the creditor remains outstanding: see Lumbers v W Cook Builders Pty Ltd (in liq).
[47] In the present case, the payment made by Pre Cast Panels on 10 June 2005 was a “course of dealing initiated by a debtor that [was] intended to, and [did], extinguish a creditor’s debt” as contemplated by the Full Court in Re Emanuel (No 14). It was the evidence of Mr Messina that Mr Smith contacted the Defendant in June 2005 and stated to Mr Messina that “he would be continuing the same business, but had set up a new company … [t]he new company was [Pre Cast Panels] … [and that] when the business took over, [the defendant] should transfer the balance of the account to [Pre Cast Panels]”. On any view, it was a course of conduct initiated by Denward Lane to discharge its debt to the defendant through payments made by a third party – Pre Cast Panels. Mr Smith was a director of both companies (and the sole director of Pre Cast Panels), he notified Mr Messina of the upcoming transfer of the account and Pre Cast Panels subsequently assumed the burden of that account. However, even if this payment was not a “course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor’s debt” (and I find that it is), then by its conduct, Denward Lane acquiesced in the payment of its debt by the third party (Pre Cast Panels) on its behalf so that the debt is taken to be discharged (see Owen v Tate and Oakleigh, possibly giving rise to a (restitutionary) right in Pre Cast Panels in the form of a claim against Denward Lane for money paid: see Lumbers.[12]
[12]Burness (n 2) [43]–[47] (citations omitted).
In my opinion, in the circumstances postulated by Gordon J, the liability to the third party arising from the transaction would be matched by the reduction in the liability of the debtor to the creditor. Overall, the creditors of the debtor would receive exactly the same dividend in the liquidation of the debtor, although the creditor who was paid by the third party would receive more than it would have in the liquidation. The transaction merely substituted one creditor for another; the third party would be substituted for the original creditor.
Further, if the creditor was obliged to disgorge the sum received to the debtor as an unfair preference, there would be a windfall gain to creditors of the debtor. The assets of the debtor would be increased by the sum disgorged and the liabilities of the debtor would also be increased by the sum disgorged. That is, the liabilities of the debtor would include both the liability to the original creditor who has now disgorged the payment which it received in satisfaction of its debt, and the liability to the third party who has received nothing in satisfaction of its debt. The result would be, in the normal case where the liabilities of the debtor exceeded its assets in insolvency, for the dividend to the creditors to be greater than if the payment to the creditor was not held to be an unfair preference. This follows from the fact that the overall result of the transaction was to increase liabilities by the same amount as the assets increased. The existing creditors would all receive a windfall gain.
In Re Evolvebuilt Pty Ltd (‘Re Evolvebuilt’),[13] Brereton J held that Gordon’s J decision on the second requirement of s 588FA(1) of the Corporations Act was in error. The relevant facts in Re Evolvebuilt were as follows. Built was the main contractor for carrying out certain interior work on a project called the ANZ project, at Pitt Street. Evolvebuilt had been subcontracted by Built to carry out the works. Evolvebuilt itself entered into secondary subcontracts for the work to be done. Unfortunately, extensive flood damage arising from a burst water pipe had the consequence that Evolvebuilt was unable to perform any work. Evolvebuilt went into liquidation. Evolvebuilt had owed money to the secondary contractors but did not pay them.
[13][2017] NSWSC 901 (‘Re Evolvebuilt’).
Evolvebuilt requested Built to pay the secondary subcontractors the sums owed by Evolvebuilt to them, but Built refused to do so. The CFMEU, as the union for the secondary subcontractors, also asked Built to pay the secondary subcontractors, which Built did. The liquidator of Evolvebuilt sued the secondary subcontractors, alleging the payments they received from Built were preferences in the liquidation of Evolvebuilt.
Brereton J held that the payments made by Built did not satisfy the first requirement of the preference test, that Evolvebuilt was a party to the relevant transaction pursuant to s 588FA(1)(a). Brereton J also held that the second requirement of the preference test was not satisfied as the payments received by the secondary subcontractors were not made by Evolvebuilt pursuant to s 588FA(1)(b).

In addressing the second requirement, Brereton J held that where a third party company paid the debt of a debtor company, it was not sufficient to establish that the payment was made by the debtor company for the debt to be paid to the creditor merely at the request or acquiescence of the debtor company. Brereton J held that such a test was not consistent with the decision of the Full Court of the Federal Court in Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd (‘Re Emanuel’).[14]
[14]Re Emanuel (n 10).
In Re Emanuel, the company Emanuel had contracted with a third party (‘EFG’) against whom Emanuel had a claim. In settlement of the dispute the subject of the claim, EFG and Emanuel agreed by deed that EFG would make a payment to Emanuel and, at Emanuel’s direction, EFG would make a further payment to Emanuel’s creditor Blacklaw.
Emanuel’s liquidator sought to recover the payment made by EFG to Blacklaw as a preference. At first instance, the claim failed. The primary judge held that if the relevant transaction was the contract, then Blacklaw was not a party to it; and if the relevant transaction was the payment, then it was made by EFG and not Emanuel.
The Court on appeal reversed the decision. It held that although the payment was made by EFG to Blacklaw, Blacklaw could be said to have received the payment from Emanuel for the purposes of s 588FA(1)(b), because Blacklaw received from Emanuel the benefit of a chose in action (the promise by EFG to Emanuel to pay, contained in the deed).
In Re Evolvebuilt, Brereton J, in discussing Re Emanuel, stated:
In reaching those conclusions, the Court first considered and overruled Nilant v Plexipack Packaging Services Pty Ltd, which the trial judge had followed. In so doing, the court said (emphasis added):
It equally was held, more questionably in our view, that for the purposes of the definition of “transaction” in s 9 of the Corporations Law, the payment to C was not “a payment made by [A]”. In reaching that conclusion, R D Nicholson J followed the decision of the Full Court of the Supreme Court of Victoria in Ramsay v National Australia Bank Ltd [1989] VR 59; 13 ACLR 732.
In that case, in construing the words “a payment made … by” in s 451(1) of the Companies (Victoria) Code, the Full Court (at 63) rejected the proposition that:
… a payment out of his own moneys by B to C, pursuant to a contractual obligation to discharge A's debt to C, an obligation imposed upon B by a contract between A and B, can be said to be a payment made by A to C. The words of s 451 must be given their ordinary, natural meaning.
We have, with respect, some difficulty with this conclusion. Before a payment made by B to C can be effective to discharge A's debt to C, ordinarily it must be made with A's authorisation or ratification: see Mason and Carter, Restitution Law in Australia, para 846, (Butterworths, Sydney, 1995); Goff and Jones, The Law of Restitution, p 17, (4th ed, Sweet and Maxwell, London, 1993); and see generally on payment of another's debt, Beatson, The Use and Abuse of Unjust Enrichment, ch 7, (Clarendon Press, Oxford, 1991). Where a payment is so made it can properly be said that it is A's act that makes B's payment efficacious at law to discharge the debt to C. This, of itself, does not provide reason for saying that the payment itself is made by A. Nonetheless where that payment constitutes part of the consideration B furnished and A required in the A-B contract and where (inter alia) that consideration is in the final settlement of the obligations inter se of A and B, then we see no compelling reason for not concluding that A has made the payment to C albeit by using B as its instrument for the purpose. It is, though, unnecessary to consider either his matter or Ramsay's case further for reasons we give below.[15]
[15]Re Evolvebuilt (n 13) [25] (citations omitted).
Brereton J observed that the Full Court distinguished between two separate and distinct questions:
In that passage, the Court distinguishes between the two questions: (1) whether the debtor A is a party to the transaction, and (2) whether the payment can be said to have been made by the debtor. The sentence which I have emphasised makes clear that they are independent, and that the circumstance that the debtor A authorises or ratifies the third party B’s payment to C does not of itself provide reason for saying that A made the payment. Pertinent to the facts of Re Emanuel, the Court then expressed the view, without deciding, that where that payment constituted part of the consideration B furnished and A required in the contract between them, and where that consideration was in final settlement of the obligations between A and B, then it seemed open to conclude that A had made the payment to C, albeit by using B as its instrument for that purpose. This is further considered when the court comes to what I have identified as the second question.[16]
[16]Ibid [26].
Brereton J then addressed the second question of whether the payment to the creditor can be said to have been made by the debtor, quoting ReEmanuel as follows:
The question here is whether the transaction resulted in Blacklaw “receiving from the company” more than it would have if the transaction were set aside and Blacklaw was to prove in the winding up of Emanuel. It is clear that what Blacklaw received from the transaction was the partial satisfaction of its debt at the rate of 100¢ in the dollar and that this was more than it would receive in satisfaction of its debt as a creditor in the winding up. But did it receive what it did from the company as the subsection requires?
There is no doubt that, if the money received by Blacklaw had been required under the Deed (i) to be paid first to Emanuel and then paid on to Blacklaw as Emanuel's money, or (ii) to be held by EFG on trust for Emanuel pending the latter's direction to pay Blacklaw, then the financial benefit accruing to Blacklaw would, relevantly, have been received from the company.
Does it make an operative difference that, rather than adopting such expedients, the Deed provided for direct payment to Blacklaw? In our view it does not and it would be surprising if it did.
What Blacklaw received from the company was the actual benefit of a valuable chose in action (ie, para 6.7 of the Deed) owned by Emanuel. Whether or not Blacklaw was a trust-beneficiary or a contract-beneficiary of that chose: as to which see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 – and it is unnecessary for present purposes to determine the rights, if any, that Blacklaw had against EFG – what Emanuel provided to Blacklaw, and what Blacklaw received from Emanuel was the actual enjoyment of the benefit secured to Emanuel by its contractual provision with EFG. That actual benefit took the form of a monetary payment which partially discharged Emanuel's debt.
If it be thought that the chose was without value to Emanuel so that it could not in consequence be said that Emanuel was giving a benefit of value to Blacklaw, it is the case that if EFG failed to make the payment as directed, Emanuel could have recovered from it the sum agreed to be paid to Blacklaw: Ashdown v Ingamells (1880) 5 ExD 280. This merely illustrates why a direct payment such as occurred in this case should not be treated differently from either the trust or the payment on contingencies to which we earlier referred.
[32] Thus – consistent with what had been said in the context of the discussion of Nilant – it was recognised that the circumstance that Blacklaw received a benefit from the transaction did not necessarily mean that that benefit was received “from the company”. The conclusion that the payment was received “from the company” depended on the circumstance that the creditor received the actual benefit of an asset of the company, namely the chose in action owned by Emanuel under the settlement deed, in circumstances where: (1) the payment was part of the consideration furnished by EFG to Emanuel under the deed of settlement between them; (2) that consideration was in final settlement of all obligations between EFG and Emanuel; and (3) the payment was made at the direction of Emanuel, and but for that direction, Emanuel would have been entitled to the benefit of the payment; moreover, (4) had EFG failed to make the payment, Emanuel could have recovered from it the sum agreed to be paid.[17]
[17]Ibid [31]–[32].
In my opinion, the relevant feature of Re Emanuel to this case is that Emanuel had an existing claim against EFG, the third party. This was an asset of Emanuel’s. This asset was released under the deed in exchange for payment to be made by EFG to Blacklaw, as part of the transaction with EFG that saw Blackwell’s debt paid. The Court found that the transaction did involve a payment by Emanuel to Blackwell.
Brereton J referred to two cases in which Re Emanuel was distinguished: Woodgate v Network Associates International BV,[18] a decision of Barrett J, and a decision of Fryberg J in Re Imobridge Pty Ltd (in liq).[19]
[18][2007] NSWSC 1260.
[19][2000] 2 Qd R 280.
Brereton J said that these cases reinforced the features of Re Emanuel:
[F]irst, that the payment was made by direction of the debtor company, pursuant to a deed which conferred the right to give such a direction on the company; and secondly, that Emanuel was legally entitled to the benefit of the payment, so that the payment came out of an asset to the benefit of which the company was entitled. The third party EFG having, for valuable consideration, agreed to pay the money to the company or at its direction, it was money to the benefit of which the company (or the general body of its unsecured creditors) was legally entitled. The direction to pay Blacklaw had the effect that one unsecured creditor was preferred. Had the direction not been given, Emanuel would have been entitled to recover the same sum from EFG, in which case it would have been for the benefit of all its unsecured creditors.[20]
[20]Re Evolvebuilt (n 13) [37] (emphasis in original).
An important passage, in my opinion, is Brereton J’s statement that the payment to Blacklaw was ‘out of an asset to the benefit of which the company was entitled’.
Returning to Burness, Brereton J considered that Gordon J’s judgment did not answer the question whether the payment was received by the creditors from the company. He did say that the decision in Burness could be explained consistently with Re Emanuel, as the debts of Denward Lane were somehow taken over by Pre Cast Panels, and it could be inferred that the consideration for the transfer by Denward Lane to Pre Cast Panels of its business included an undertaking by Pre Cast Panels to pay Denward Lane’s business debts.[21] On that analysis, he said:
Pre Cast Panels had, for valuable consideration, covenanted to discharge Denward Lane’s debts and the payments to the creditors were of money to the benefit of which Denward Lane was legally entitled so that creditors could be said to have received it from Denward Lane.[22]
[21]Ibid [43].
[22]Ibid.
Brereton J concluded:
Although it may well be that the payments by Built had the effect of discharging Evolvebuilt’s indebtedness – either because Evolvebuilt assented to them, or because the liquidators subsequently did so – it does not follow that they were made by or received from Evolvebuilt. The payments were made out of Built’s assets, and not out of any asset to the benefit of which Evolvebuilt was otherwise entitled. Thus they were made by, and received by the defendants from, Built and not Evolvebuilt. This is so, even if making the payment gave Built some right to restitution against Evolvebuilt. If it were otherwise, then the satisfaction of a creditor’s debt by the debtor’s guarantor would constitute a payment on behalf of the debtor and be liable to be avoided as a preference. To set aside those payments and order their “repayment” to the company which had never been entitled to them would confer on the company and the general body of unsecured creditors a windfall which they would not have received had Built not chosen – unconstrained by any legal obligation to do so – to make them. This feature was not present in any of the cases on which the liquidators rely. In this case it cannot be said in any sensible way that those were received from, or made by, Evolvebuilt. They therefore do not fall within s 588FA(1), or s 588FF(1)(a).[23]
[23]Ibid [66].
It is important to note that Brereton J expressly excluded as a payment by the company the situation where the satisfaction of the creditor’s debt by the third party would give rise to a right of restitution by the third party payer against the company. That would be the situation if no debt were owed by Rock Development to Eliana. The transaction would give rise to a right of restitution by Rock Development against Eliana.
Brereton J said that s 588FA(1)(a) is concerned with payments made by and received from the company. His Honour said:
That the section is concerned with payments made by and received from the company is plain from those words, but is confirmed by the terms of s 588FF(1)(a), which provides that, where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may, inter alia, make an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction. It is also supported by the policy and purpose of provision for the recovery of unfair preferences, which is to ensure that unsecured creditors are not prejudiced by the disposition of assets in a period shortly before the commencement of a winding up which would have the effect of favouring certain creditors. A payment made by a third party which does not come out of the company’s assets does not offend that policy.[24]
[24]Ibid [21] (emphasis in original).
Again Brereton J identified in this passage the essence of a preference, being ‘the disposition of assets in a period shortly before commencement of a winding up which would have the effect of favouring certain creditors’.
In my opinion, this passage has considerable force and merit when assessed against the purpose of the legislation, particularly the reference to s 588FF(1)(a) and the relief available upon the establishment of an unfair preference, including ‘an order directing the person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction’.
The observations of Brereton J in this passage also highlight the difference between the situation where the payment by the third party only creates a liability on the part of the debtor and involves no payment of money by the debtor, and the situation where the payment by the third party creates a reduction in the assets of the debtor, which does involve the payment of money.
Re Evolvebuilt went on appeal to the New South Wales Court of Appeal. In Hosking v Extend N Build Pty Ltd (‘Hosking v Extend’),[25] Bathurst CJ, with whom Beazley P and Gleeson JA agreed, dismissed the appeal. The appeal was decided on the ground that Evolvebuilt was not a party to the transaction, as the payments were made pursuant to an agreement between Built and the union. Nevertheless, Bathurst CJ set out the reasoning of Brereton J, without express approval or disapproval.
[25]Hosking v Extend (n 11).
Bathurst CJ addressed Re Emanuel at some length and concluded:
Re Emanuel is essentially authority for two unsurprising propositions. First, an agreement for consideration between a debtor company and a third party by which the third party is required to pay funds to a creditor of the debtor company and does so pursuant to a direction by the debtor company can constitute a “transaction” within the meaning of that expression under s 9 of the Act. Second, a payment to the creditor pursuant to a direction of the debtor company with which a third party is contractually bound to comply is a payment “from” the debtor company for the purpose of s 588FA(1)(b) of the Act.[26]
[26]Ibid [31].
Bathurst CJ also addressed Gordon J’s decision in Burness and the decision of the Full Court of the Federal Court in Commissioner of Taxation v Kassem.[27]
[27](2012) 205 FCR 156.
After canvassing these three decisions, the judgment of Brereton J, and the submissions of counsel, the Chief Justice said:
[91] As the primary judge correctly pointed out, there are two matters which must be established for a transaction to constitute an “unfair preference” within the meaning of s 588FA(1). First, “the company and the creditor must be parties to the transaction” and second, the transaction must result in “the creditor receiving from the company … more than the creditor would receive from the company” if the transaction were set aside. Each of these matters must be established by the appellants.
[92] As was pointed out in Re Emanuel, a transaction can be made up of a series of interrelated dealings. Thus, in the present case, if it could be established that, as a result of an arrangement (whether express or inferred) between Evolvebuilt and Built, Built reached an arrangement with Evolvebuilt and its creditors, being the first to fifth respondents, pursuant to which those creditors were paid, that would constitute a relevant transaction for the purposes of s 588FA(1)(a).
[93] This highlights the importance of identifying the “transaction” to which Evolvebuilt was said to be a party. In the present case, the appellants contended that the payments to the first to fifth respondents were as a result of both the request from Evolvebuilt to Built on 12 March 2013 as well as the request or demand by the CFMEU to Built on the same date, or as they put it, both requests were part of a “chain of causation” which resulted in the payments to the respondents by Built.[28]
[28]Hosking v Extend (n 11) [91]–[93].
The Chief Justice concluded that the appellants had not established Evolvebuilt was a party to the ‘transaction’ as a result of which the payments were made by Built. The Chief Justice said that:
[111] In these circumstances, it is not necessary to consider whether a creditor receives “from the company” a payment in respect of an unsecured debt for the purposes of s 588FA(1)(b) where, as part of a “transaction”, the payment is received from a third party and the debtor company authorised or acquiesced in the payment being made on its behalf so as to give rise to a “restitutionary” claim against it in favour of the third party. I am inclined to the view that, if the “restitutionary” claim resulted from a “transaction” to which the debtor company was a party, then the payment could be said to have been received “from the company”. This is consistent with the reasoning of Gordon J expressed in Burness at [46]-[47]. However, it is unnecessary to reach a final conclusion on this issue or on whether Built would have such a “restitutionary” claim in the present case. Nor is it necessary to determine the question left open by the Full Court in Kassem at [59] of whether it is necessary for there to be a diminution in the debtor company’s assets for a transaction to constitute an “unfair preference” under s 588FA(1).[29]
[29]Ibid [111].
In my opinion, where the transaction involves a reduction in the debtor’s assets which can be measured in money and a consequential discharge of the creditor’s debt by that sum, then the transaction can be said to involve a payment by the debtor to the creditor within the meaning of s 588FA(1)(b) of the Act.
Where, however, a payment by the third party which discharges the debtor’s debt to the creditor is authorised and ratified by the debtor and only involves the debtor incurring a liability in favour of the third party, and no reduction of assets of the debtor, then, in my opinion, the payment does not, on that ground, constitute a payment by the debtor to the creditor within the meaning of s 588FA(1)(b) of the Corporations Act.

Both these conclusions are consistent with the judgment of Brereton J, as discussed above.
On the facts in this case, I have found that there has been no diminution in Eliana’s assets by reason of the transaction. I am not satisfied that, in those circumstances, the payment of $220,000 to Mad Brothers was from Eliana within the meaning of s 588FA(1)(b) of the Corporations Act. For the reasons discussed above, I find that the fact that Eliana authorised and ratified the payment by Rock Development is insufficient to constitute a payment by Eliana to Mad Brothers and thus is insufficient to establish that an unfair preference has been given by Eliana to Mad Brothers.
On the other hand, if I am wrong and Rock Development did owe in excess of $220,000 to Eliana, then I find that the effect of the whole transaction which was agreed upon and carried out was to prefer Mad Brothers over the other creditors of Eliana.[30] The transaction had the effect of reducing Eliana’s assets by $220,000 and discharging the debt owed by Eliana to Mad Brothers. The request by Eliana to Rock Development to pay its debt would have created a liability to Rock Development that reduced the amount owed by Rock Development to Eliana. In those circumstances, I would find that the transaction did involve a payment by Eliana to Mad Brothers of $220,000 and did constitute an unfair preference given by Eliana to Mad Brothers.
[30]Re A & J Lazzarotto Pty Ltd (Supreme Court of Victoria, Young CJ, Lush and Fullagar JJ, 16 December 1977). The decision is attached to Jetaway Logistics Pty Ltd (rec and mgr apptd) (in liq) v Deputy Commissioner of Taxation (2008) 68 ACSR 226.
It is clear from my reasoning that I see merit in Brereton J’s observation that Gordon J’s test could lead to a windfall gain to creditors beyond that which they would have achieved if the transaction had not been entered into. I doubt that such a windfall gain is in accordance with the object of the relevant provisions. The object is to prevent damage and disadvantage to the creditors, not to make a windfall gain for creditors.
As found above, I am not satisfied that Rock Development was indebted to Eliana. Accordingly, I find that the associate justice erred in finding the payment by Rock Development to Mad Brothers constituted an unfair preference. If it had been owed, I would have found that the associate justice was correct to find the transaction was an unfair preference.
Ground twelve – Was Rock Development liable as an undisclosed principal?
Mad Brothers submits that, even if the payment was preferential, the amount which the associate justice ordered Mad Brothers to disgorge should be reduced by the sum of $87,256.15.
Some invoices which comprised part of the debt owing by Eliana to Mad Brothers related to work Mad Brothers performed at 7 Ingram Place, Taylors Hill (‘Taylors Hill site’). Mad Brothers claimed before the associate justice that a finding could be made that it was engaged to perform work at the Taylors Hill site by Eliana as agent for Rock Development as an undisclosed principal. Four facts were said to support this claim. First, there was no building contract in existence between Eliana and Rock Development for work at the Taylors Hill site. Second, Rock Development owned the Taylors Hill site. Third, Rock Development received the benefit of the work performed by Mad Brothers. Last, specific invoices totalling $87,256.15 relating to the Taylors Hill site were exhibited to Mad Brothers’ statutory demand. According to Mad Brothers, as Rock Development received the benefit of the work and was liable to pay Mad Brothers the sum of $87,256.15, Eliana was not entitled to recover that part of the payment.
The associate justice did not accept this submission, stating:
It is telling that all of the invoices were sent by the defendant to Eliana. There is nothing on the evidence which could lead to a conclusion that Rock Development was an undisclosed principal and Eliana was its agent. This is a mere assertion by the defendant.[31]
[31]Re Eliana (in liq) (n 1) [60].
With respect, the point that the invoices were sent to Eliana is not ‘telling’; it does not meet the submission that Rock Development was an undisclosed principal.
The evidence does establish that Rock Development owned the Taylors Hill site,[32] and presumably obtained the benefit of any works done to that land. Specific invoices were identified which quantify the work performed to Rock Development’s benefit in the sum of $87,256.15.[33] Although apparently called upon to produce a building contract between Rock Development and Eliana in respect of the Taylors Hill site, such a contract was not produced.[34] In my view, where Rock Development obtained a benefit in the sum of $87,256.15 for work performed at the Taylors Hill site, Eliana is not entitled to recover that part of the payment as a preference payment.
[32]Appeal Book 276; Transcript of Proceedings, Re Eliana (in liq) (29 May 2018) 47.10–13.
[33]Defendant’s Closing Submissions, 27 June 2018 [58]; Appeal Book 289, 294, 301, 309, 317.
[34]Re Eliana (in liq) (n 1) [59].
Accordingly, if I had found the payment to Mad Brothers was a preference (and subject to the availability of a defence under s 588FG(2), which is discussed below), I would also reduce the preferential amount that Mad Brothers could be ordered to disgorge to $132,743.85.
Grounds thirteen to seventeen – Did Mad Brothers establish a defence under s 588FG(2)?
Mad Brothers contends that the associate justice erred in finding that it had not made out a defence under s 588FG(2) of the Corporations Act. In the event that I am incorrect in finding the payment was not an unfair preference, I must address this defence.
Section 588FG(2) of the Corporations Act provides:
A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:
(a)the person became a party to the transaction in good faith; and
(b)at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
(c)the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.[35]
[35]The respondents did not dispute that Mad Brothers received the payment in good faith and provided valuable consideration under the transaction.
The tests under s 588FG(2)(b)(i) and (ii) are often referred to respectively as the subjective test (though in truth it is hybrid in nature)[36] and the objective test. The associate justice does not appear to have expressly decided whether the subjective test was satisfied; Mad Brothers’ witnesses gave evidence that they did not suspect Eliana’s insolvency, and the associate justice agreed they were witnesses of truth.[37] His Honour, in any event, went on to consider the objective test, and concluded that as ‘a reasonable business person would have no basis to believe Eliana was solvent in the circumstances’,[38] Mad Brothers had failed to establish a defence.
[36]See Re Alsafe Security Products Pty Ltd atf Alsafe Trust (in liq) [2016] NSWSC 428 (‘Re Alsafe’).
[37]Re Eliana (in liq) (n 1) [72]. It is insufficient for a creditor to merely establish that it had no actual or subjective suspicion of insolvency, the creditor must also establish that the facts and matters appreciated by the creditor were insufficient to induce a suspicion of insolvency in the mind of a reasonable person: White v ACN 153 152 731 Pty Ltd (in liq) (2018) ACSR 182 [120]–[121] (‘White’).
[38]Re Eliana (in liq) (n 1) [87].
In coming to this conclusion, the associate justice relied on Eliana’s offer to pay the debt by instalments, the issuing of both a statutory demand and winding-up proceedings by Mad Brothers, and the existence of another creditor who had applied to wind up Eliana.[39]
[39]Ibid.
The matters to which the associate justice had regard are accepted indicia of insolvency.[40] Mad Brothers’ challenges to the associate justice’s findings can be summarised as a complaint that the associate justice did not also take into account or did not give proper regard to other relevant matters which occurred after the issuing of Mad Brothers’ winding-up proceedings and prior to payment being received.
[40]See, eg, ASIC v Plymin (2003) 175 FLR 124 (‘ASIC v Plymin’).
For the reasons which follow, I consider that the associate justice erred in his conclusion by failing to have proper regard to the information provided to Mad Brothers and other events which occurred after the statutory demand was issued and the winding-up proceedings brought, but prior to payment being received. If the associate justice had had proper regard to the material provided to Mad Brothers and considered whether those facts and matters which subsisted when payment was received were sufficient to induce a ‘positive apprehension’ as to ‘actual insolvency’,[41] I am satisfied that he ought to have come to the conclusion that the defence under s 588FG(2) was established.
[41]See Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 (‘Queensland Bacon’).
Relevant principles
In White v ACN 153 152 731 Pty Ltd (in liq),[42] the Court of Appeal of Western Australia recently reviewed the application of the first and second limbs of the defence.
[116] In the first limb, the reference to ‘the person’ would ordinarily be taken to mean that particular person in that person’s circumstances.
…
[120] ...[T]he first limb appears to be directed to the facts and matters actually (subjectively) appreciated by the ‘person’. If the facts and matters appreciated by ‘the person’, from the range of information in the possession of ‘the person’, were sufficient to induce a suspicion of insolvency in the mind of a reasonable person, the first limb cannot be satisfied. Moreover, it is the negative which must be proved. Under the first limb, unless the relevant creditor can prove that the facts and matters appreciated by the creditor were insufficient to induce a suspicion of insolvency in the mind of a reasonable person, the first limb cannot be satisfied.
[121] … it is insufficient for ‘the person’ merely to establish that, on the facts and matters which the person appreciates, the person had no actual (subjective) suspicion of insolvency…
[122] In considering, in relation to the first limb, what facts and matters ‘the person’ appreciated, regard would ordinarily be had to the training, skills and experience of the ‘the person’ in question. Thus for example, the matters appreciated by a sophisticated creditor such as a merchant bank with its accounting and economic expertise, may be different from the matters appreciated by a relatively unsophisticated sole trader.
…
[126] Accordingly, the question raised by the first limb is whether the facts and matters actually appreciated by ‘the person’, ie, the particular creditor, were sufficient to induce a suspicion as to insolvency in the mind of a reasonable person. The question raised by the second limb is whether the facts and matters which would have been appreciated by a hypothetical person with the knowledge and experience of the average business person in the creditor’s circumstances, were sufficient to induce a suspicion as to insolvency in such a hypothetical person…[43]
[42]White (n 37). See also Re Alsafe (n 36) [33]–[34]; Re Evolvebuilt (n 13).
[43]White (n 37) [116], [120]–[122], [126].
In addressing ‘suspicion’, the associate justice quoted the decision of the Court of Appeal in Sutherland v Lofthouse:
“Suspicion” for that purpose means a mistrust of the company’s ability to pay its debts as they become due and of the effect which acceptance of a payment would have as between the appellants and the company’s other creditors.[44]
[44]Re Eliana (in liq) (n 1) [68] quoting Sutherland v Lofthouse (2007) ACSR 655 [16].
Statements from the decision of the High Court in Queensland Bacon Pty Ltd v Rees (‘Queensland Bacon’)[45] are often cited in considering the meaning of ‘suspicion’.[46] In that case, Barwick CJ opined (in relation to s 95 of the Bankruptcy Act 1924–1960 (Cth)):[47]
The existence of knowledge or suspicion of insolvency negatives good faith: and the knowledge of circumstances from which ordinary men of business would conclude that the debtor is unable to meet his liabilities is knowledge of insolvency.[48]
…
… the circumstances of the voided payment must be such as to lead to the inference that the creditor knew or had reason to suspect the fact of the debtor’s insolvency. It is not enough that the circumstances are such as to lead to the inference that the creditor had reason to suspect that the debtor might be insolvent. The words of the sub-section, to my mind, are quite clear that it is the fact of actual insolvency which must be known or suspected. To be insolvent, the debtor must be unable, as distinct from being merely unwilling, to pay his debts as they fall due. It is one thing to suspect a man’s solvency in the sense that one doubts whether he is solvent or insolvent. It is another thing to suspect that he is in fact insolvent. It is of the latter suspicion that s. 95(4), in my opinion, speaks.[49]
[45]Queensland Bacon (n 41).
[46]See, eg, White (n 37); Chicago Boot Co Pty Ltd v Davies & McIntosh (as joint and several liquidators of Harris Scarfe Ltd) (2011) 282 ALR 378 (‘Chicago Boot Co’).
[47]Section 95(4) of the Bankruptcy Act 1924–1960 (Cth) was in the following terms: For the purposes of this section a creditor shall not be deemed to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge, payment or obligation were made or incurred under such circumstances as to lead to the inference that the creditor knew or had reason to suspect that the debtor was unable to pay his debts as they became due, and that the effect of the conveyance, transfer, charge, payment or obligation would be to give to him a preference, a priority or an advantage over the other creditors.
[48]Queensland Bacon (n 41) 287 (Barwick CJ) (citations omitted).
[49]Ibid 291–2 (Barwick CJ).
Also in Queensland Bacon, Kitto J stated:
A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to a ‘slight opinion, but without sufficient evidence…’.[50]
[50]Ibid 303 (Kitto J).
In my view, therefore, it is necessary to address the following matters:

(a) What were the facts and matters actually appreciated by Mad Brothers?

(b) Were those matters insufficient to induce a suspicion as to insolvency in the mind of a reasonable person? As per the statements in Queensland Bacon, the suspicion as to insolvency in the mind of a reasonable person must be a positive apprehension of actual insolvency, not a suspicion that the debtor might be insolvent. If so, Mad Brothers has established the first limb of the defence.

(c) Were there any other facts or matters which a hypothetical, reasonable business person in Mad Brothers’ position would have appreciated that Mad Brothers did not, and were those other facts or matters insufficient to induce a suspicion as to insolvency? If so, Mad Brothers has established the second limb of the defence.

Chronology of matters relevant to the good faith defence

In answering those questions, I consider that it is helpful to set out a short chronology.
Between late 2015 and early 2016, Mad Brothers performed earthmoving labour for Eliana. By January 2016, Eliana was indebted to Mad Brothers in the sum of $228,870.08. When Mad Brothers commenced pursuing this outstanding debt, it learned that Mr Sowiha was disputing the rates charged by Mad Brothers. A meeting was then held between representatives of Eliana and Mad Brothers, following which Mr Sowiha agreed to pay what Mad Brothers had charged after learning that an Eliana representative had apparently agreed to those rates. Mad Brothers then considered the matter resolved, and performed further work for Eliana to the value of $88,082.23. In early March 2016, Eliana paid Mad Brothers $80,000. When no further payments were received, on 23 March 2016 Mad Brothers issued a letter of demand in the sum of $236,952.31. Around 30 March 2016, Eliana offered to make payment of that sum by instalments, but subsequently claimed that the sum in the letter of demand should be reduced by the $80,000 sum which Eliana had paid in March. Mad Brothers had in fact already credited that sum.
Around April 2016, Ms Haddrell (the financial controller for Mad Brothers) sought legal advice about commencing debt recovery proceedings against Eliana, but was allegedly advised that it was more effective to issue a statutory demand. On 26 April 2016, Mad Brothers issued a statutory demand and on 8 June 2016, it filed a winding-up application against Eliana. Meanwhile, on 31 May 2016, the Victorian WorkCover Authority had filed a winding-up application against Eliana (‘the WorkCover winding-up application’). On 13 July 2016, however, when Mad Brothers advertised its Notice of Application for Winding Up with ASIC, no supporting creditors made themselves known.
Meanwhile, on 6 July 2016, Mad Brothers was notified that Eliana had commenced VCAT proceedings to dispute the debt claimed by Mad Brothers. The WorkCover winding-up application was dismissed on 20 July 2016. The first return date of Mad Brothers’ winding-up application was also on 20 July 2016. On that day, solicitors for Eliana sought an adjournment of the hearing, relying on an affidavit filed by Mr Sowiha to the effect that a number of properties owned by Eliana, Mr Sowiha or a related entity were incorrectly caveated and this was interfering with Eliana’s ability to obtain finance. The hearing was adjourned to 17 August 2016. It is now known that in August 2016, Eliana ceased to trade and suspended its workforce, however, it appears this fact was kept both from Mad Brothers and from the court. On the second return of Mad Brothers’ winding-up application on 17 August 2016, a further adjournment was granted until 24 August 2016, on the basis of an affidavit filed by Mr Sowiha to the effect that the caveats had been successfully removed and that finance arrangements which had previously been hindered were now being proceeded with. Mr Sowiha exhibited documents showing that he (or a related entity of Eliana) had entered into various arrangements to obtain finance in excess of $4.2 million, with settlement expected to occur within two to three weeks.
On 23 August 2016, prior to the third return date, Mr Sowiha filed a further affidavit. This affidavit explained that Mad Brothers’ statutory demand had not been complied with or disputed as it had been sent to Eliana’s internal legal department, and Eliana’s in-house lawyer had taken personal leave and then resigned without returning. The affidavit further set out that Eliana was now disputing the debt in VCAT (for which an expert report had been commissioned) and requested that Eliana be able to pay the funds in dispute into court pending the outcome of the VCAT proceedings.
Also on 23 August 2016, an affidavit was filed by Mr Mokbel Gendy, the accountant for Eliana, which went to Eliana’s solvency. Relevantly, Mr Gendy swore to the following:

(a) He had been Eliana’s accountant since 2000;

(b) Eliana had demonstrated a profit in each of the years 2012–2015 (and copies of Eliana’s tax returns for those years were exhibited);

(c) He considered that Eliana was solvent and stable;

(d) Eliana had:

(i) total assets comprising real estate in the amount of $37,224,000;

(ii) total liabilities comprising amounts required to satisfy compromised litigation and alleged defective building disputes in the amount of $236,952.31;

(iii) total borrowings representing a lending ration of 45.98 per cent;

(iv) a net position of assets over liabilities, conservatively at $20,108,360;

(e) Mr Sowiha was organising a cash injection in excess of $3 million to be available by 30 August 2016.

A balance sheet showing the information set out in sub-paragraph (d) above was allegedly exhibited to Mr Gendy’s affidavit, although it appears the exhibit was not provided to the court.[51]
[51]Transcript of Proceedings, Re Eliana (in liq) (29 May 2018) 62; Transcript of Proceedings, Re Eliana (in liq) (30 May 2018) 172; Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 340–2.
On the third return of the winding-up application on 24 August 2016, the hearing was adjourned by the court to 16 September 2016 to allow Eliana to produce audited accounts by 9 September 2016. It appears Eliana’s counsel indicated to the court and to Mad Brothers’ representatives that these could be provided.[52]
[52]See Order of Gardiner AsJ, 24 August 2016 (Appeal Book 526).
No audited accounts were in fact produced by Eliana by 9 September 2016, but on 15 September 2016, the day prior to the final winding-up hearing, Eliana and Mad Brothers settled the proceedings in exchange for payment to Mad Brothers of $220,000. Ms Haddrell gave evidence that, following receipt of the affidavits of Mr Sowiha and Mr Gendy detailed above, she received legal advice to settle the proceedings with Eliana, as it was thought that Mad Brothers would struggle to establish Eliana’s insolvency and may be subject to an adverse costs order. It is not clear from the evidence whether this advice was given before or after 9 September 2016 (when Eliana was due to produce audited accounts).
Consideration
Were the facts and matters actually appreciated by Mad Brothers (through Mr Maddalon, Mad Brothers’ director, and Ms Haddrell) insufficient to induce a suspicion as to insolvency in the mind of a reasonable person?
Mr Maddalon gave evidence that, notwithstanding that he ran a successful business with 60 employees, he was a ‘farm boy … not a financial controller’,[53] and that he was a ‘hands-on kind of bloke, machine operator’, who ‘pop[s] his head into the office every now and then, but [leaves] the financial stuff up to [Ms Haddrell]’.[54]
[53]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 298.9–10.
[54]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 280.13–18.
In their evidence, Mr Maddalon and Ms Haddrell identified the following facts and matters as those which they actually appreciated in relation to Eliana’s solvency or otherwise.
The debt had been the subject of ongoing disputes. While Mad Brothers understood the initial dispute to have been resolved, Mr Maddalon considered Mr Sowiha was still upset about the rates.[55] Mr Sowiha’s claim that the payment of $80,000 had not been properly credited further delayed payment. Ms Haddrell and Mr Maddalon had intended to issue debt recovery proceedings in April 2016, not a statutory demand, until they received legal advice to do otherwise.[56] By July 2016, the debt was undoubtedly disputed, with Eliana having commenced VCAT proceedings.
[55]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 299.
[56]Affidavit of Anthony Maddalon, 27 April 2018 [14]; Affidavit of Susan Haddrell, 27 April 2018 [13].
It also appeared to Ms Haddrell and Mr Maddalon that Eliana had access to funds, as it had commissioned an expert report and briefed solicitors and counsel to appear at VCAT. Ms Haddrell and Mr Maddalon’s view that Mr Sowiha and Eliana appeared to have access to funds was confirmed when caveats were successfully removed from over a significant number of properties, and documents relating to forthcoming finance were provided. Mr Maddalon considered that Eliana was going to use those funds in the VCAT proceedings to pressure Mad Brothers to accept a lower sum.[57] Ms Haddrell and Mr Maddalon considered that in order to extend finance, Eliana and Mr Sowiha’s financiers would have had to be satisfied that Eliana was solvent, could provide security, and could service the loans.[58] Mr Maddalon particularly noted that Eliana had filed sworn material as to its solvency and, as it was sworn on oath, that was something he really believed in and believed had to be true.[59] Mad Brothers’ legal advisors had indicated to Mad Brothers that, in light of the financial material provided, Mad Brothers should consider settling in order to avoid an adverse costs order.[60]
[57]Affidavit of Anthony Maddalon, 27 April 2018 [37].
[58]Affidavit of Anthony Maddalon, 27 April 2018 [40]; Affidavit of Susan Haddrell, 27 April 2018 [41].
[59]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 303.21–25.
[60]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 303.11–20, 344.15–25, 346.31 – 347.3.
The respondents contend that the associate justice correctly concluded that the financial material provided by Eliana would not have been relied upon by a reasonable business person as it was not audited and was from 2015, when the payment was made in 2016.
Eliana’s main contention is as follows. There was a presumption of insolvency arising from the failure to comply with the statutory demand, and because the material filed by Eliana was insufficient to dislodge that presumption for the purposes of the Court dismissing the wind-up application, then, similarly, on an objective test, a reasonable person would have grounds to suspect the company was insolvent. Eliana argues that a reasonable person would question why, if Eliana was disputing the debt and could produce audited accounts, it would pay the debt in full and not produce the accounts.
I digress to deal shortly with the point of the purpose for which the statutory demand was issued. The respondents (and the associate justice) noted that it is difficult for a defendant to make out a good faith defence in circumstances where payment follows the service of a statutory demand.[61] In Chicago Boot Co Pty Ltd v Davies & McIntosh (as joint and several liquidators of Harris Scarfe Ltd) (‘Chicago Boot Co’),[62] the Full Court of the Supreme Court of South Australia considered the purpose for which a statutory demand was issued in the context of the good faith defence. White J, with whom Nyland and Anderson JJ agreed, stated:
[81] However, I do not understand the authorities to indicate that the statutory demand procedure may not be used as a means of enforcing payment by a recalcitrant debtor of an undisputed debt. For example, Austin J in Poonon v Deputy Commissioner of Taxation said (at [21]):
[21] The use of the statutory demand procedure for debt collection may be objectionable as an abuse of process in cases where, for example, the creditor is aware that there is a genuine dispute in respect of the debt. But there is nothing in the law which per se prevents a person who claims indebtedness from using the statutory demand procedure and subsequently making an application for winding up.
…
[82] In my opinion, courts should not be oblivious to the prospect that some creditors may use a statutory demand as a means of enforcement of the payment of undisputed debts by a dilatory debtor. In other words, there may be some circumstances in which statutory demands are served in which there is no real spectre of insolvency.[63]
[61]Re Eliana (in liq) (n 1) [70] quoting Muller v Academic Systems Pty Ltd [2007] QCA 218.
[62]Chicago Boot Co (n 46).
[63]Ibid [82] (citations omitted). See discussion in [78]–[83]. See also Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509, 516 (‘Dowling v Colonial Mutual’): proceedings are an abuse of process if they ‘are taken solely as a means to some collateral and illegitimate end, and not as a bona fide means of obtaining payment of a debt’ (Griffith CJ).
The Full Court upheld the trial judge’s decision that, on the evidence in that case, the issuing of the statutory demand could not be understood as only a means to enforce payment and there was a suspicion of insolvency.[64]
[64]Ibid [85]–[87].
In my view, the evidence in this case satisfies me that Mad Brothers was using the statutory demand as a debt collection tool on a dilatory debtor and that there was no real consideration of Eliana’s solvency or otherwise (noting that at the time the statutory demand was issued, Mad Brothers considered the earlier dispute over rates had been resolved[65]). For example, the evidence given by Ms Haddrell in cross-examination was in the following terms:
[65]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 322.21–31.
Counsel:And so Mr Walker from Madgwicks had already discussed with you before this letter, hasn’t he, about the statutory demand process?
Ms Haddrell: Uh, he had.
Counsel:Did he say that was the best way forward with this debt?
Ms Haddrell: He said it was the most effective way to get our money.
Counsel:Yes. And so you decided at this point if they didn’t pay, you’d issue the stat demand, wouldn’t you?
Ms Haddrell: Ah – I wanted to issue court proceedings, but Madgwicks actually said that this was a much more effective way to get your money.
Counsel:And they explained to you what would happen? That if they don’t respond to the stat demand, the would be wound up?
Ms Haddrell: Um, yeah. He did explain that to me, but he also did say that it was a way to get your money. Most companies didn’t want to end up in that position.[66]
…
Counsel:And then you were told, weren’t you, about the process, that there would be a presumption that Eliana is insolvent and, therefore, hopefully, a wind-up would eventuate? You were told that, weren’t you?
Ms Haddrell: I wasn’t told that there was a presumption that they were insolvent. I didn’t have any grounds to believe that they were insolvent. I – we just wanted our money. That was – we were advised that this was the best way to get our money, and we have no experience in this, and Grant advised – Grant from Madgwicks, advised us that this was the most effective way to get our money.[67]
[66]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 321.20 – 322.3.
[67]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 323.21–31.
Similarly, Mr Maddalon gave evidence in cross-examination about the instructions to issue the statutory demand:
Counsel:There was no payments made, and so you or Ms Haddrell instructed Madgwicks to issue the wind up application?
Mr Maddalon:   No, Madgwicks instructed us.
Counsel:Instructed?
Mr Maddalon:   Yeah, told Sue next procedure is we’ll have to send a wind up.
Counsel:So, do you mean instructed or advised?
Mr Maddalon:   Advised, yeah advised Sue, because this is new to us, we’ve never been down this path before.
Counsel:But you understood what a wind up application meant didn’t you?
Mr Maddalon:   Yeah, pretty much winding up the company trying to chase our debt.
Counsel:And a liquidator being appointed?
Mr Maddalon:   Yea.[68]
[68]Transcript of Proceedings, Re Eliana (in liq) (31 May 2018) 290.18–29.
I return to the material provided by Eliana as to solvency. The associate justice did not address the material as to solvency in his concluding paragraph as to the good faith defence. Where his Honour addresses the material as to solvency provided by Eliana is in paragraph [85], where his Honour says:
As to the affidavits filed before the Court, the defendant’s solicitor must have known that the material filed was not sufficient to prove solvency. The account of Mr Gendy were not up to date and there were no audited accounts.
In support of this statement, the associate justice cited the decision of Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd.[69] In that matter, Weinberg J considered a contested application for winding up and whether the company had discharged the onus of demonstrating solvency. Weinberg J summarised the applicable principles, including the following statement:
Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared.[70]
[69][1999] FCA 728.
[70]Ibid [44] (citations omitted).
It is clear that the material filed by Eliana in this matter and provided to Mad Brothers was not sufficient to prove solvency to a court in order to prevent a winding up. To this end, on 24 August 2016, Gardiner AsJ made orders adjourning the winding up, noting that Eliana ‘wishe[d] to produce’ audited accounts to support its contention of solvency. However, whether solvency has been established to the satisfaction of the court for the purposes of avoiding a wind-up application is a separate question from whether the material provided would dispel suspicion of insolvency in a reasonable business person, and care should be taken not to conflate those tests.
While I accept that the provision of older, unaudited accounts may, in some cases, be insufficient to dispel a suspicion of insolvency,[71] in the circumstances of this case, I consider it was a relevant countervailing factor to the indicators of insolvency which had preceded it. As counsel for Mad Brothers submitted, company accounts can take some time to prepare and it was not unusual for 2015–2016 financial year accounts to not be finalised by September 2016.[72] The accounts were not audited, but I do not consider that a reasonable business person (as opposed to an insolvency practitioner, financial expert or the Court) would consider this was reason enough to reject their contents. Further, this material was provided relatively contemporaneously with other material which indicated that Eliana had current access to not insignificant funds.
[71]See, eg, ASIC v Plymin (n 40).
[72]Transcript of Proceedings, Re Eliana (in liq) (28 June 2018) 379.5–14.
I consider that the appellant has established that the facts and matters which were actually appreciated by Mr Maddalon and Ms Haddrell were insufficient to induce a suspicion as to insolvency in the mind of a reasonable person. A reasonable person could conclude that Mr Sowiha was deciding not to pay, rather than that he could not pay. A reasonable person could conclude that Eliana had access to fairly significant funds, and that persons or entities providing those funds were satisfied as to Eliana’s (or its director’s or related entity’s) ability to repay those loans. A reasonable person would tend to believe the contents of documents which have been filed in this court. A reasonable person inexperienced in questions of solvency and insolvency would rely on legal advice from their advisors as to the adequacy of material filed by the other party.
Were there any other facts or matters which a hypothetical, reasonable business person in Mad Brothers’ position would have appreciated that Mad Brothers did not?
Eliana and the associate justice refer to the WorkCover winding-up application, which was also on foot against Eliana as a matter which should have induced suspicion. While the fact of this other proceeding was not subjectively appreciated by Mad Brothers (or by its individual representatives),[73] it is a matter which a hypothetical, reasonable person would have appreciated.
[73]Transcript of Proceedings Re Eliana (in liq) (31 May 2018) 326.3–14.
The respondents submit that knowledge of the WorkCover winding-up application should have put a reasonable business person on a chain of enquiry about the application, which would have led them to discover that there were a number of supporting creditors in that application. The authorities indicate, however, that it is not appropriate to take into account information which a reasonable person may have hypothetically obtained had certain enquiries been made,[74] so a reasonable business person would have only appreciated the fact that there was a concurrent winding-up application. It could not be known by a reasonable person, however, whether that winding-up application was brought due to WorkCover’s suspicion as to Eliana’s actual insolvency, or whether it was brought as a means of obtaining payment of a debt.[75] The WorkCover winding-up application, in any event, was dismissed on 20 July 2016. There is no evidence that the reason for the dismissal was known; it may have been because the debt had been paid out in full by Eliana. In my view, the fact of the WorkCover winding-up application, when considered together with its dismissal some two months prior to Mad Brothers receiving payment, is not a matter sufficient to induce a suspicion as to insolvency in a reasonable person.
[74]See Cussen as liquidator of Akai Pty Ltd (in liq) & Anor v Commissioner of Taxation (2004) 51 ACSR 530 [114]–[121] (Spigelman CJ with whom Handley and Tobias JJA agreed).
[75]See Dowling v Colonial Mutual (n 63) 516.
I conclude that Mad Brothers has established that the facts and matters which subsisted at the time it received payment from Eliana fell short of being capable of establishing a positive apprehension of actual insolvency in the mind of a reasonable person. The associate justice should therefore have found that Mad Brothers made out a defence under s 588FG(2). By operation of that section, the Court could not make any order materially prejudicing Mad Brothers’ rights or interests.
Conclusion
I have found that, in the facts of this particular case, there was no unfair preference given by Eliana to Mad Brothers as a creditor of Eliana, and, even if there was, Mad Brothers has established the good faith defence. I therefore allow the appeal and will set aside the orders made by the associate justice.
I will hear the parties on costs.

[2019] VSC 546

19 August 2019